Metcash Limited (MG9.F) Earnings Call Transcript & Summary

Good morning everyone, and welcome to the Metcash Financial Year '21 Half Year Results Briefing. I'm Jeff Adams, the Group CEO, and I'll be talking you through the group and business results this morning. With me in the room today is Brad Soller, our group CFO; and Brad will be taking you through the financials this morning. Brad will then hand back to me, and I'll give you our half 2 '21 outlook, and then we'll take your questions. Before I start the results, with me, just to quickly introduce a few other members of my team in the room with me today starting with our business CEO, Scott Marshall, CEO of our Food business; Chris Baddock, CEO of Liquor; and Annette Welsh, the CEO of our Hardware business. As many of you know, our Hardware business is based in Melbourne, so it's really nice to finally see Annette again in person and for her to be in the room with us this morning. Also with us this morning is Alistair Bell, our new group CFO, on his first official day of duty. Alistair has been with us since the 1st of September and has been getting himself up to speed on the business, while Brad's continued on in the group CFO role. So this will be Brad's last results briefing, and I want to, again, thank Brad for all of his efforts over the last 3 years and a bit with me, but also over his almost 6 years at Metcash. He's played a key role in helping us in our turnaround plans during that time and leave Metcash in a much better position today. I'm sure the analysts will be thinking up some really good questions for Brad today to send him off in the right way. I know some of you have already met Alistair, but for those of you haven't, Alistair, do you want to give a quick intro of yourself?

Thank you, Jeff. Good morning to everyone. I'm delighted to join Metcash. Also, I'd like to thank Brad for the orderly transition and having the time, in the last couple of months, for him to hand the reins close to mind. So many of you already know that I spent nearly 10 years at GrainCorp. The opportunity to join Metcash is complementary to my past in a number of different ways, including extending my interest in the food and beverage sectors, albeit that GrainCorp was upstream in the supply and manufacturing chain. Like GrainCorp, Metcash is a portfolio organization with its 3 pillars, each operating at different stages in maturity, but all having strategic intent, operating as an essential service during COVID and a clear purpose championing the success of independent retailers. I'd like to say this is very similar to partnering with the guys for which I've just left behind. So I look forward to meeting everyone in person as and when it is appropriate. Jeff, I'll hand back to you.

Okay. Thanks, Alistair. And again, welcome to the team. Just moving on now to the presentation. Slide 2 is our purpose, vision and values. As said at our last full year results briefing, I don't think you could have had a better example of us living our purpose and what the business did for the independent retailers in financial year '20, between the bush fires, the floods and the start of the COVID pandemic. But 6 months on for making that statement and having seen the significant challenges the business has had to overcome in the first half of financial year '21, I've been even more impressed with the group's resilience and focus on championing the success of our independent retailers through these unprecedented times. I believe the results we are announcing today are a testament to us having lived that purpose. So just moving on now, I'm not planning to cover Slides 4 and 5 in detail, but we have tried to outline on those slides the many challenges, I mentioned that, that we have had to face since the start of the pandemic and how well all parts of our network have adapted and responded. Truly an exceptional performance under very difficult circumstances. Moving on to Slide 6, the group highlights. We have seen significant growth in the half in both our sales and earnings, with group revenue, including charge-through sales up 12.3% to $8.1 billion. The group underlying earnings up 30.4% to $203 million. We have clearly delivered strong earnings leverage in the half. We've seen the strong growth in sales and earnings across all 3 of our businesses, being driven by the consumer behavior change to more local shopping and the success of our MFuture initiatives, really delivering a better shopping experience for those customers. Underlying profit after tax increased 43%, and the statutory profit after tax was $125.1 million versus a loss of $151.6 million in the first half of financial year '20. We have generated a significant amount of cash in the half and improved our working capital position from our end of financial year '20 results. Brad will cover more on these when he gets to the financials. While we have strictly followed the COVID safe work practices at all of our sites, we have been able to manage those costs well and more normalize our costs in the half versus the end of the last financial year. And we're very excited about the future growth opportunities we now have from both of our recent acquisitions: Total Tools and Hardware and the Kollaras private label brands in liquor. And Brad will give you some additional details on Total Tools in his update. We've started the second half of financial year '21 well, and I'll give you more details on how we are trading during the first 5 weeks when we do our outlook statement at the end of the presentation. And finally, on this slide, the Board has approved an interim dividend of $0.08 per share fully franked versus $0.06 per share in the first half of FY '20. I'm not going to cover the next slide, the results overview by pillar, as I'll talk you through each of the businesses results on the following slides. So moving on now to the food sales on Slide 8. Total food sales are up 9.5% to $4.8 billion and up 16.3% if you exclude the impact of Drakes and 7-Eleven; with supermarket sales up 14.6% to $4.1 billion and up 18.3%, excluding the Drakes impact. Supermarket ex tobacco sales are up 13% and up 16.7%, excluding Drakes. We've outlined some of the key drivers on the sales there, which would be very similar to what we talked about at the end of the last financial year and have remained consistent into this financial year. While COVID has helped to get new and returning customers back into our stores, we believe the great work from Scott and his team over the past 3 years to improve the stores and the competitiveness of our retailers has assisted us in retaining many of those customers. We've seen strong sales growth in all states with VIC being the strongest due to the extended lockdown period there. Our retailers' like-for-like sales were up 16.4%, and this has resulted in the IGA network gaining market share. We have also seen further improvement in our teamwork score which has increased to 74.3% in the half, driven by growing our range and new and returning suppliers being serviced through our DCs. And just to finish up on the slide, we are net positive on store openings in the half. And while our convenience sales decreased due to the loss of the 7-Eleven volume, underlying sales improved by 5.2%, with strong sales into the regional and remote areas. Looking now at Food EBIT on the next slide. Total Food EBIT increased $14.6 million or 16.5% to $103 million, with EBIT margin improving to 2.1%. This has been driven by our sales growth and the improving performances in our JV network and well-managed costs in the half. Also, as noted there, first half '21 did not include any contribution from the resolution of onerous leases versus about $6 million in the first half of FY '20. The EBIT growth versus last year also comes without any contribution from Drakes and SA and without 3.5 months of 7-Eleven sales. As I mentioned at the beginning, each of the businesses have been strictly following the COVID safe work practices at every site, but has been able to manage those costs very well in the half versus the start of the pandemic and the panic buying back in March and April. Moving on to the Food initiative slide now. I'll briefly touch on these today. However, I would like to point out that we are in the planning stages to hold another Investor Day in early March to update you on the progress on the MFuture initiatives in more detail as well as what we see as the next phase of this program. We had outlined before that MFuture would be a 5-year transformation program. And in March, we will be 2 years into the MFuture program. This will be a good time to talk to you about what we see as the next stage of this program. And Steve Ashe will be in touch shortly with more details as we firm up those plans. Looking now at the food initiatives. Despite the many challenges of the COVID restrictions, the team has continued to make good progress against most of their end future initiatives. Under store clarity, the work around the brands and store standards has been mostly completed with the retailer working group. The first new Supa Valu branded store has been opened very successfully at Doonside here in New South Wales. And the second store is under development in Ballina, New South Wales. Under store network, we have completed a further 48 DSAs in the half, which is a real credit to the team and the retailers to get those done despite significant challenges and very busy stores. 539 stores have now been completed through this refresh program. The sales growth from the DSAs, even removing the COVID uplifts, remain very strong. And it's encouraging to see so many of our retailers interested in upgrading their stores, so our pipeline for future DSAs remains very strong. We have continued to make progress in private label in the half and have also now added a new range of discounted products for retailers. On the last initiative there on -- under low-cost operator, fantastic to see our new SADC completed and opened this month, and I'll talk more about that later in the presentation, another great effort from the team to get this done despite all of the challenges from the COVID restrictions. And as I previously mentioned, it's great to see a good list of newer returning suppliers coming back to being serviced out of our DCs, a real testament to Scott and his team's work on being a low-cost operator, and this is helping to improve our teamwork scores. Moving on to our Liquor results now, on Slide 11. Total liquor sales in the half increased 14.3% to $2 billion, with significant growth in our retail stores, more than offsetting the impacts of the ongoing restrictions to our on-premise customers. Our warehouse sales have been particularly strong through our IBA bannered networks, up 24.1%, driven by the changes to consumer behaviors we've outlined there on the slide, with the IBA retailers' like-for-likes even stronger at 27.1% increase. And just a final point on this slide, we do see our on-premise customers at various stages of recovery, depending on the state's trading restrictions with some starting to recover now. Liquor EBIT, on the next slide, improving by $9.4 million or 30.6% to $40.1 million with EBIT margin up to 2% with good earnings leverage from the sales and by costs being well-managed in half from Chris and his team. Moving to the Liquor MFuture initiatives. The same comment applies here into the Hardware MFuture initiatives as I called out on Food. I'll briefly touch on the progress on these today, but we'll be providing more detail at the Investor Day in March. So looking first at digital. The team continues to make good progress on their digital initiatives with more stores signing up for the Shop My Local marketplace. Further progress on the POS integration work and a new trial of a celebrations bannered e-commerce website in Victoria is now up and running. Under store network, the team has continued to progress to work on improving ranges, pricing and investing into store upgrades, all helping to retain new and returning customers. Also very good to see an additional 111 new stores in the half. I'll skip the on-premise initiative, as I previously mentioned, the recovery is different state by state, depending on the local restrictions or the lifting of those restrictions, and this changes on nearly a weekly basis. Finally, on the liquor initiatives. After making the acquisition of the Kollaras private label brands at the end of the last financial year, the team is now in place to really begin to drive that business forward. We have historically under-indexed against the change in private label, and I know Chris sees this as a great growth opportunity for both us and the retailers. And Chris will have more to say on this at our Investor Day. So just moving on now to Slide 14, Hardware sales. Total sales, including charge through, increased 20.6% to $1.3 billion, with DIY driving most of that growth. We do have a number of acquisitions now in the hardware sales numbers. So backing those out, our sales have increased 16.2%. As I mentioned, DIY is the main driver for most of that growth and we've listed on the slide a number of factors driving that, including the changes in consumer behavior. One call out there is the success and growth in our loyalty program with over 1.1 million members now. Our retail network like-for-likes have improved by 13.2%, with DIY up 35% and trade back into growth of 4%. The DIY growth has shifted our mix in the half to 40% DIY from 36% last year, with DIY at higher margins than the trade business. Also, it's great to see the teamwork score from Home Timber & Hardware improving now to over 70% from below 60% when we did the acquisition. Moving to the Hardware EBIT slide. Hardware EBIT has increased $25.6 million or 65.8% in the half, driven by the significant increase in our sales volumes, particularly in the higher-margin DIY products. The contribution from our recent acquisitions and the improved performance in our JV and company store network. The hardware team has continued to do a very good job in managing their costs, which has also helped in delivering that earnings leverage. Hardware wholesale EBIT margin improved slightly to 3.2%, reflecting the mix change. And overall, IHG EBIT margin improved to 5.1%, driven by the strong performances in our acquisitions and the JV and company store network. Looking now at Hardware MFuture initiatives on the next slide. And again, I'll just touch on a few of these on the slide today, and we'll go into these in more detail in March. Our Sapphire store refresh program has continued to make progress in the half, and we are expecting to have another 40 completed by the end of this financial year, a real credit to Annette and the hardware team who are largely based in Melbourne and who've had to continue to work through the restrictions and extended lockdowns there. And also to the ongoing commitment from the IHG retailers to invest back into their stores. Under build trade, we're very excited about the growth opportunity we now have with the Total Tools acquisition. It's a great strategic fit for us and will help us accelerate our trade business. Brad will give you more detail on the Total Tools acquisition in his update. Further progress has been made on other key initiatives there like Trade Only stores, the Whole of House partnerships and accelerating the rollout of our Trade technology suite of apps. Looking at growing our retail network, we have 102 company in JV stores, and they continue to be a very big contributor to both our sales and our EBIT. And finally, on this slide, we've made solid progress in digital in the half, with our online sales growing by over 100%. We've added a click-and-deliver option now in a few of the states, and we have plans in place to begin to roll this out across the network. We've successfully trialed an upgrade to our loyalty program from a store-based scheme to an open program with customers free to earn and redeem rewards at any store, and we'll now be looking to roll this out to the rest of the network in half 2. And the team has recently launched a new trade website. Finally, from me, before I hand over to Brad. The next slide is some info about our new SADC at Gepps Cross, which opened at the beginning of this month. This is the culmination of many years of work and planning and a real credit to everyone involved to have stayed the course and completed this project despite the many challenges they faced because of the COVID restrictions. With this new DC operating, we are in a much stronger place to support our SA retailers with a broader range of products in a much more cost-efficient operation. I'll now hand over to Brad to talk you through the financials.

Thanks, Jeff, and good morning, everyone. As Jeff outlined in his presentation, it has, in many ways, been a truly exceptional first half. And I'm extremely proud as to how Metcash has navigated through these challenging times to deliver a very strong financial result. As usual, I'll take you through the key aspects of our financial performance. So let's start with the group profit and loss account. Jeff has already spoken to the performance of the pillars, which is the result down to the group EBIT line. So I'll now give a brief overview of the other key lines in the profit and loss account. As you can see, depreciation and amortization at circa $78 million is in line with last year. In the past, we have called out that our maintenance CapEx should trend broadly in line with depreciation. This year due to the adoption of AASB 16, depreciation includes about $50 million charge in relation to right-of-use assets. This needs to be excluded when using depreciation as a proxy for maintenance CapEx going forward. Net finance costs of $21.3 million is $5.3 million lower than last year as a result of both lower average borrowings and lower interest rates in the period. As you'll see in the notes to our accounts, the biggest component of the finance cost now relates to the interest charge in respect of leased assets. The group's effective tax rate was slightly lower this half at 28.4%, mainly due to the higher equity accounted profits, which are reported on a post-tax basis, and therefore not included in the Metcash tax number. Significant items in the half were only $4.5 million post-tax compared to $242 million last year, and the IHG increase, as significant, are in line with our guidance. The group reported earnings per share of $0.127, is a 27% increase from last year. The higher earnings results in the group growth and increasing 430 basis points to 30.4%. Moving to the cash flow statement. The group generated significant cash flows in the half, with operating cash flows of $314.9 million compared to $88.8 million in the prior year corresponding period. The cash conversion ratio in the half was 151.8%, which is significantly higher than our maintainable cash conversion ratio target of circa 90%. The key reason for the higher cash conversion ratio is a significant reduction in working capital. You will recall, at the end of last year, we flagged a significant buildup in working capital, of which a portion was attributed to COVID-19. We also advised that this increase will begin to reverse in FY '21, and our working capital position has indeed reduced since April by about $85 million. This is despite acquisitions in the Hardware and Liquor pillars, which add to our working capital position. Capital expenditure in the half was in line with the prior year at $30 million and which is also broadly in line with our depreciation charge, excluding depreciation of right-to-use assets. During the year, we spent $101 million acquiring businesses, the most significant being the acquisition of 70% interest in Total Tools, which cost us $57 million and the acquisition in the Liquor pillar of Kollaras that resulted, in the half, $26 million. There was a net influx from the sale of business and loan movements of $7.2 million, a significant component of which relates to the repayments of loans to retailers. It was pleasing to see, as a result of the strong trading of the past 6 months, that a number of retailers repaid their loans earlier than expected. As a result, and after inclusion -- including dividends paid in the period, we ended the half with a net cash position of $172 million, and this is reflected in the group balance sheet on the next slide. As called out on the cash flow slide, we saw $85 million decrease in working capital, a big component of which was the unwind of the COVID position. The increasing intangibles reflects the $101.7 million of acquisitions in the period, a significant proportion of which was allocated to goodwill. The balance sheet reflects a year net cash position of $172 million versus cash of $87 million at the end of FY '20. The group clearly has significant capacity to invest in growth opportunities. Our debt facilities are outlined on the next slide. The group, as I said, ended the half in a net cash positive position. The positive cash position reflects the strong cash flow for the half -- during the first half, and the equity raising carried out at the end of FY '20. While we ended the half with no debt, we should not lose sight of the significant uncertainties we faced at the time the equity was raised. Going forward, I believe net cash will continue to deploy capital in a disciplined manner. However, if this capital is not allocated, it can, based on the cost base attributed to the shares, together with our franking capacity, to return to Australian shareholders in a tax-efficient manner. Based on the more stable outlook, we have canceled $150 million of debt facility, refinanced $225 million of debt that was due to mature in August 2021. As you can see on the slide, the group has a well distributed debt maturity profile. On the next slide, I'd like to expand on Total Tools acquisition, and importantly, the accountant treatment we're required to follow. The Total Tools acquisition aligns with our Hardware strategy, which has a strong focus on trade customers. We acquired a 70% interest in Total Tools in 1 September for a consideration of $57 million. As part of the purchase agreement, there are puts and call arrangement in place that will see net cash ownership increase to 100% by 2023. Importantly, the purchase price of $57 million was based on Total Tools earnings prior to significant uplift Total Tools had seen since the imposition of COVID restrictions. The business has continued to trade very well. And in the first 2 months of net cash ownership, Total Tools delivered an EBIT of just under $5 million, which is based on 100% ownership interest. The network currently comprises 84 independent stores and 2 company-owned stores. Net cash has provided Total Tools with a $40 million debt facility to acquire an ownership interest in a select number of independent stores. In effect to convert these stores to corporate stores, much like we have successfully done in Mitre 10. And subsequent to the half, Total Tools acquired a controlling interest in 4 stores and is in advanced negotiation to acquire further 8 stores. Metcash will have initial ownership in these stores of between 51% and 50%; and as with Total Tools holding, there are put and call arrangements in place to see Metcash ownership increase to 100% by 2024. We expect operation and merchandise synergies to be delivered from the acquisition and for these to commence in the second half of the year. As Total Tools will not be fully integrated with Mitre 10 but rather operate separately and as the overlap of products range is not as significant as it was between Mitre 10 and HTH, the quantum and synergies to be delivered is not expected to be anywhere near the synergies delivered on the HTH acquisition. As we previously announced, Mark Laidlaw, will Chair the TTH Board. Paul Dumbrell will continue on as CEO, and I have also agreed to remain on the Total Tools Board, even though I have now stepped down as the CFO of Metcash. So the accounting for Total Tools and how does that work? Firstly, the revenue number is low as it only records sales related to franchise fees, owned brand price and corporate stores for the sales and sales margins we report are not relevant metrics. Secondly, due to the existence of put and call arrangements, we are required to consolidate 100% of Total Tools profit, and then we are required to recognize a liability for the minority interest we do not own. In this regard, in the half year accounts, we have recognized a liability of $68.9 million in the balance sheet in relation to 30% of equity in TTH, as I say, which we don't currently own. These 2 options, when query value, each reporting date and the higher the forecast earnings, the greater the liability that needs to be recognized. We therefore could get into a position that we're recognizing a charge to the P&L despite the improvement in earnings. For that reason, we'll separately disclose any revaluations in the put option, and this will enable investors to better understand the underlying earnings from Total Tools. Moving to the dividend. The Board has approved an interim dividend of $0.08 per share, which is in line with our current payout ratio of guidelines of 60% of underlying earnings in the half. Our shares would go ex dividend on the 22nd of December, and the dividend will be paid on the 29th of January. So that's it for my presentation. But before I hand back to Jeff, I want just to go through the outlook statement. As this is my last presentation, I just want to convey my thanks and appreciation to you, both our shareholders and the analysts who cover our stock. I've been with Metcash now for -- coming up to 6 years, and I've got to know many of you over this time. I think you'll all agree, there have been many positive changes over this period. I'm very proud of what my finance and the broader management team has achieved. The group is, without a doubt, in a stronger position than it was 6 years ago, and the management team has worked hard to achieve this. I believe Metcash is a great sense of purpose. And through what the management team has done, the independent network is in a healthier and more competitive position. It's been an absolute pleasure sharing the journey with you all. I'd like to thank Jeff and the rest of the leadership team for their support, and I wish Alistair the best of luck in the role and believe you will lead Metcash well through its next chapter. I'm sure our paths will cross again, but thank you all for your robust challenges, and at times, you're very difficult questions, and -- but most of all, for your support. I'll now hand back to Jeff to go through the output statement, and then we'll take your questions.

Okay. Thanks, Brad. So turning to the outlook statement now. The group has had a strong start to the second half with sales momentum continuing in all pillars in the first 5 weeks of the second half of financial year '21. Subject to any adverse change in government restrictions, it is expected that trading will benefit from more people traveling domestically over the Christmas and New Year period and our retail network's strong representation in regional rural areas. The second half will cycle the negative impact of the bushfires in the first half of financial year '20 -- or second half of financial year '20, and it also includes the cycling of the significantly higher sales volumes in Food and Hardware in March and April of 2020. In Food, sales in the first 5 weeks of the second half '21 are up 2.1%, and that's plus 12.1%, excluding the 7-Eleven impact, with supermarket sales up 12.1% and 8.4% ex tobacco. Sales in the second half '21 will be negatively impacted by the previous supply agreement with 7-Eleven ending in August 2020. The Food pillar will continue to progress its MFuture initiatives to further improve the competitiveness of the retail network and exist in the retention of new and returning customers gained through the COVID-19 period. The business continues to have a strong focus on costs to help offset the impact of inflation and other cost pressures, including those related to the COVID-safe work practices. In Liquor, sales in the first 5 weeks of the second half '21 are up 16.9% with continued elevated demand in the IBA retail network, more than offsetting the adverse impact of COVID-19 restrictions on on-premise customers. On-premise customers have started to recover in states with easing in restrictions. Sales to the IBA retail banner group over the same 5 weeks are up 22.6%. The business is continuing to progress its MFuture growth initiatives, particularly the expansion of its private and exclusive label range and digital strategy, while supporting customers adversely impacted by the COVID-19 restrictions. In Hardware, sales in the first 5 weeks of the second half '21 are up 25.3%, 19.3% if you exclude Total Tools, with sustained strong demand in DIY and trade sales continuing to track positively. The business will continue to focus on its MFuture growth initiatives across trade, DIY and digital and retaining customers gained through the COVID-19 period. The second half will include a full 6 months of trading in Total Tools, including the 4 stores acquired and anticipated acquisition of a majority interest in the further 8 independent stores. There continues to be a high level of uncertainty as to the potential impact on all of our pillars of any changes in COVID-19-related restrictions and resulting changes in consumer behavior. I'll pause there, and we can start to take your questions.

[Operator Instructions] Your first question comes from Shaun Cousins from JPMorgan.

Thanks, Brad, for your time over the years as well. Maybe just to start on Food comps. Can you just talk a little bit about how Food, like-for-like, has performed across the different states? I think you called out Victoria as a highlight. But maybe you could give us some color around where a state like WA, which is somewhat sort of COVID-free, how that has performed during the half, please?

Yes. Look, I think, Shaun, I'll give you a bit and then maybe see if Scott wants to add to it. So I mean, we've seen fairly consistent sales across all of the states. Obviously, as we called out VIC would have been the strongest because of the extended lockdown periods there. As restrictions have eased up, we have seen some changes, but sales across all of the states remain quite strong. I don't know, Scott, if there's anything you want to...

Yes.

Yes. I think, Shaun, we'll break it down by state. But if you take that total like-for-like number of sort of the 16% sales up, you could assume from that, that WA is trading quite well. We had called out pre-COVID that we were getting the business back into growth in both WA and SA. So for me, that COVID new normal has still led to our stores performing well.

Great. Secondly, just in terms of store numbers, you've highlighted that your sort of store numbers had grown in Food. But at the back of the pack, you've actually got I think it was 30 openings and 41 closures and/or leaving the network. Can you just talk a little bit about your store network, why it sort of down a wee bit? But then also when we should start to expect store openings from your store owners, given that they're obviously performing very well at present?

Yes. So the numbers that we called out there, Shaun, are on new store openings. So they are net positive. The numbers you're talking about in the back have to do with stores that were de-bannered in the half. Is there anything that you want to?

No, I think that's exactly right. Yes.

Great. And maybe just one for Brad. Just finally, just in terms of MFuture, can you just quantify the cost savings that were realized in the half? I think there was a comment made some time ago now that there'd be $50 million across fiscal '20 and '21 combined. I'm just curious if that sort of played out roughly, say, $12.5 million in the first half, just contrast it, that the one-off the restructuring costs were quite modest in the first half '21. I was curious around the path of cost savings realization in the half, please?

So the easiest way to actually look at, I guess, to call out the [ formation ]. One is the actual level of the relationship of overheads back into sales numbers. You would have actually seen a decline in that percentage. It went down from 7.5% to 7.3%. Some of that actually is the operational leverage, as we obviously actually get as a business actually continues, sales have actually grown. There were continued to actually deliver some cost savings. I said there was significant cost savings coming out of the Hardware pillar, in particular. The setting of the Hardware pillar was really put -- had COVID break, that we could see a lot of pressure on sales. And it turned out that way, and we're very pleased in that way that it turned that way. But they did actually take out a quantum of sales as well -- sorry, a quantum of cost as well.

Your next question comes from Ross Curran from Macquarie.

I was just wondering if you might be able to help us understand the growth in Hardware? And the impact that maybe restrictions on your competitor restricting customer numbers in-store might have had in that and how things have traded once your competitors' eased trading restrictions? So maybe the best way to answer that might be on geographic mix. Can you help us understand the Hardware sales by state, is that possible?

No. Well, look, we haven't broken it out by state. But I think there's not a whole lot more we're going to be able to say, to be honest, more than what we put in there. We've seen a strong growth in DIY. That's fairly consistent across all of the states, driven mainly from the reasons that we put in there, people staying at home and deciding to do a lot more home improvement projects and maintenance, a lot of gardening has been driven in that as well. We did see some impact, although we've not called it out when we had the extended lockdown period in Metro Melbourne. But during that same time, we saw the sales in the other areas outside of Metro Melbourne were actually a bit stronger. So the net-net of it, it sort of evened itself out. But really, it's return to growth, as we've called out in trade and then also the significant uptick that we've had in DIY. I don't know, Annette, is there anything you want to add to that?

I think the only thing I would add is we had, obviously, exactly the same level of restrictions in Melbourne Metro. Customers were unable to go further than 5 kilometers. And to that extent, it would have driven some of those customers to their closest hardware store, and we benefited from that.

And then just secondly, around the COVID cost, the $8 million of COVID costs in the half. How is that allocated across the divisions? Does that mostly sit in the food business? Or where should we see that?

The majority of that, I mean, there's been a bit of cost in each of the businesses, but the majority of that would have been in Food.

Your next question comes from Grant Saligari from Crédit Suisse.

The -- just, the Total Tools EBIT contribution over the 2 months is obviously quite strong, a lot stronger than the accounts from prior years would show. Are you able to sort of comment without, obviously, expecting guidance or anything like that but are you able to call any bond, earnings expectations coming out of Total Tools to the extent to which that 2-month number that we've seen there is a reasonable read on the future?

Yes. Well, I think Paul and the team there, Total Tools, has done an excellent job as has their retailers. And I think they've been pleasingly surprised in the same way that we have at the uplifts that they've seen during these COVID restrictions. I think probably some of the same factors about some of the stimulus that's gone in from government's help to drive some of their performance, but they've had a very good first half of the year as well. I don't know, Brad?

Just as a number now. So if you look at where we actually got to, we call that the actually reported a profit of $4.8 million. Remember, but -- never looked back, in fact we've got 100% of the earnings, even though we actually only own 70%, so you get that crazy accounting treatment coming through there. So if that's 2 months, you guys can actually make whatever assumptions you actually want for the balance of the next 6 months as to how we're going to track, whether the thing is going to get better or worse in terms of the outlook. There is a significant amount of uncertainty still out there at the moment. The other thing to remember is that we are actually acquiring those corporate stores. So there's a Total Tools corporate stores that we're actually going to buy. We've already actually closed a 60% interest in 4 stores. And there's going to be a further 8 stores that we're actually going to buy somewhere between 50% and 60%, and we hope to close on those very, very shortly. Just to give you an indication to try and guide you to some earnings so that we get to give you a number. The only thing I can share you, too, is that we've actually spent $40 million acquired in net interest. And obviously, we would expect a significant return on that $40 million. You can clock a number around it. You could take 15% if you wanted to or whatever number in terms of the return that you'd actually expect, that would give you at least $6 million of earnings for the year.

Helpful.

Okay. That's helpful. And still on Total Tools, are you able to elaborate a little on how or if you think it's possible to get a greater share of the profit pool there? Because as you've pointed out, and I completely agree, the network sales number is obviously quite a lot higher than the revenues that you report. And the profit of those share values appear quite low to us anyway. So wondering whether you could just elaborated at all on the ability to get the profit share of that business.

Yes. So I think in terms of actually how can those earnings actually grow of the future. The key driver for growth in the future will be those -- as we actually corporatize those stores, and we actually get the actual ownership interest in those independent stores. And the other thing we should actually -- is they still got a fairly good runway on their ability to open new stores. So if you look at the new stores that they actually had, at the time of the acquisition, it was 82 stores they had in the portfolio. The number of stores have now gone up to 86. So they've actually opened 4 stores in a relatively short space of time. And Paul and the team over there believe that there's still a pretty good runway for them to actually open additional stores going forward. There are some synergies that will actually come through, just actually lets you know that those synergies shouldn't -- as I called out in my presentation, won't be anywhere near the quantum synergies we've got through -- with the HTH acquisition, which was significant, so that will actually give another kick to earnings as well. So we think it's pretty -- still a pretty good run rate to growth.

And we're planning to get Mark -- unfortunately, Paul -- well, not unfortunately. Paul's wife's due to have a baby in March. So we've asked him to delay that, but apparently, she can't. So anyway, we're planning to get Mark along in March to the Investor Day, and we'll give you more detail about Total Tools at that day.

Your next question comes from Bryan Raymond from Citi.

The first one's just on the slowdown in supermarket sales over the first 5 weeks. So we've obviously seen industry growth still running in the sort low double-digit range based on ABS data. You guys were well ahead of that in the first half that you've seen the pace of growth what, you basically have. It's around 8%. Can you just talk to whether you think there's any major shifts that have happened in November and early December around either industry growth or the independents role within the industry? Or are you starting to see some of that market share gain [ be supplied ]. How do you guys view that sort of?

Well, look, the only thing we could compare against, Bryan, would be what the numbers that the change have put out for their first sort of 4 weeks or so and against those numbers, we still see the -- our like-for-like numbers are still quite strong. So 12.1%, I mean, it was unlikely it was going to carry on at those sort of early panic buying periods that went on. But to be at 12.1%, I think, is still a pretty strong result for supermarkets compared to the other numbers that are in the market.

Sure. I guess within that, I'm sort of trying to unpick that and I can see tobacco, the contribution from tobacco stepped up quite a lot as well. That differentiated and widened. Is there -- is that to do with the excise coming through? Or any specifics around why -- because your underlying momentum looks like it slowed a bit more than that total sale number.

Yes. No. Look, I think you're right. You do get that after September, you get the increase in the tobacco because of the excise that goes through. But the underlying supermarket business is still performing very well. And as I said, the numbers that the chains put out would include tobacco. So our comparison numbers' there of 12.1% to their numbers would be like-for-like.

Okay. Okay. Perfect. And then just also just on Hardware business. So I can also understand the -- in that $4.8 million, you did have 2 corporate stores contributing to that for the full 2 months as well. Those 2 have been there for the whole year, is that fair?

So what -- in terms of the stores we're actually going to acquire, Bryan, the additional stores will actually take it up to 14 corporate stores level.

Right. Yes. Just trying to unpick that $4.8 million contribution in the half and also the revenue, as you -- so my question is, was there a meaningful contribution from the corporate stores within the half, i.e., there's 2 in there that you called out as company owned?

[ Might not make ] sense in the wholesale business.

Yes. No, it wouldn't have been material from those 2 stores.

Right. And then in terms of the acquisition process, is there a fixed multiple you guys apply to these? Or how do you decide what the acquisition price is for those that are coming up from the corporatized perspective?

So the important thing -- 2 things to call out there, when we actually put those deals, we actually did it on the pre-COVID earnings. So we didn't bite any of the [ high out and ] actually paid. It was then back to pre the uplift in earnings and all the independent store owners has actually accepted that. And yes, there actually was a multiple of their earnings pre COVID.

Right. Can you disclose what sort of multiple you're paying for those? Is that going to be consequent going forward?

I think we -- as we intend to actually do some more, I mean, and we haven't finished the negotiations on the ones we are still to close, it probably wouldn't be a good idea to share with those in an open forum today.

Sure. Okay. Okay. And then as you open new stores into that network, are they more likely to be corporatized stores? Or is there the potential for those stores to be independently owned?

No. The plan would be most -- the majority -- absolute majority of them would be franchisees. We've got a very strong network plan looking forward, and again, I think in March, we can share more of that.

Okay. Great. And then one last one, just on -- within the broader hardware business, what's the mix of sale currently between wholesale and the retail JV stores?

I couldn't -- sorry, Bryan, you were breaking up there, can you ask again?

Sorry. I'll repeat that. Within the broader hardware business, what was the mix of sales during the half between wholesale and retail subject these stores?

Yes. I mean from the company's stores, it's about 40% of our sales.

Your next question comes from Andrew McLennan from Goldman Sachs.

Congratulations, Brad, on your tenure. I know there's been many hands turning this business around, but yours been pivotal, so congratulations and look forward to catching up at a later date. My questions are more around, not so much the performance of this result, which is excellent, obviously benefiting from the COVID tailwinds. I'm just wondering how you're going to be turning this tailwind into to longer-term gain, in particular, if you could talk to 2 points, firstly, with respect to Food. Our feedback suggests that -- and you've alluded to this already about store openings, so if you can discuss a little bit further. But also, just given the significant uplift in profitability for franchisees, what you can do to accelerate refurbs on the DSA, particularly considering the government's accelerated depreciation should enable some tax benefits there? So that's the first thing, if you could talk about Food. And then secondly, with respect to Tools, with the successful Total Tools acquisition on your belt, you've got a very strong position now in trade. I'm just wondering how we should think about this business going forward from a consolidation perspective? Could you say that the growth -- you are a mile ahead of anyone else in the trade part of the market. I'm just wondering how we should think about future consolidation opportunities.

Yes. So look, I think I'll start on that one and then maybe let Scott add to that. So I mean, we're 9 months into this now, and customers have been shopping with us for that 9-month period of time where we've seen this elevated level of sales. I think in that period of time, if they didn't like it, they have plenty of opportunity to go somewhere else. And so the work, again, that I think that Scott and the team have done on -- over the last 3 years on improving the competitiveness of the retailers through significant investments, through these refreshes that we've done, 539 of those completed now, the work around range and price. The comments continue to come back from the retailers about these returning and new customers, having a very positive shopping experience. And again, over that long period of time, if the customer didn't like it, they could have gone somewhere else. So very encouraging to have the sales levels that we're still experiencing, even though restrictions have been easing in a lot of places. I mean net store openings, if that was your question. I think we continue to see a good pipeline of new stores coming through. And equally, we also see quite a strong pipeline, as we said, of retailers that are interested in, not only in new stores, so the investment there, but also investing back into these DSAs, and they are hearing from the other retailers, how well they've done after they've done these DSA refurbishments. So it's really encouraging, but we've still got sort of 40% or more of the network that we've got an opportunity to continue to do the DSAs. Before we do the Total Tools, is there anything you want to add on that one?

I would probably add, and thanks, Andrew, for the question. The new stores and the route there, together, I think we absolutely have a lot of confidence back in the model with our retailers. And I think down the track, the economic stake will create some opportunities in the retail space for locations. So I think there is a big appetite from our retailers now. We are in a good position, who would like to grow. And I think on the DSAs, if you look at the first half, the fact that we still completed 48 store refurbs, which are a significant piece of work in the middle of COVID and all the implications that had through the supply chain of equipment, et cetera, it's a pretty big sign of the retailer commitment to get this done. And I'd like to think, coming out of it, we will have more momentum in that space.

Yes. So Scott, I guess the bottom line is in 2 regards, I mean, shouldn't we be expecting net store openings to really start to become more of the contributor to the top line? And then secondly, do you need to reposition the DSA program? I think it's probably well placed given the changes in the government depreciation. But do you need to step it up? Or are you happy with the offering at the moment, given the increased interest from store owners? It seems like it's an opportunity to really step-change things.

Yes. So what I would call out there, and I tried to say it a different way. The fact we still got 48 done in a COVID environment means we have stepped it up. We called out that we were -- and last year was our largest year of DSA. We would have cycled a similar number, I think, excluding COVID. So we'll be going hard in that space. And for new stores, I think coming in, I said we had to stop the decline, and a lot of our market share growth was -- loss was around the footprint as opposed to through the register. So we would expect we've now stopped that decline. So that will become positive, and we'll share more of our plans in March, I think, when we get together. But we will chase those opportunities with our retailers.

And back to hardware?

So was the question around, do we think there's further consolidation opportunity?

Yes, exactly. Just given the scale and the positioning in the trade part of the market, just how much more consolidation could be?

Look, I think it's still very fragmented. There's still lots of opportunities out there for us to, similar to Total Tools, really step change and if we're able to find the right strategic fit and the value work for that, then certainly, we'd be interested but there's still lots of opportunity because it's still a very fragmented market in Hardware. Annette, do you want to?

Yes. I think the one thing to say is that there's real confidence in the model that we have and in the heritage in trade in that format in the top 5 in addition of seeing codes in South Australia and [ seamlessly ] through to the group. So we'll look to continue to drive that.

Your next question comes from Richard Barwick from CLSA.

Just going back sort of where Andrew, with his last questions, just thinking about what level of these, particularly within supermarket sales that can be retained? I know, Jeff, you're saying that people have been shopping after 9 months and they keep on coming back. I mean that's -- yes, that's -- I can say that's true, but you have -- the evidence or anything else you talk to seems quite anecdotal. Is there -- have you actually done any research or any other data you can point to, to say that you're clear on what people are seeing or saying about shopping in the stores, why they are choosing to shop there now? Just trying to get a sense of how confident can we be that this is not a onetime COVID boost and you can actually retain these customers?

Yes. Well, as ever, it's very difficult to predict the future. But as I said, from my retail experience, it's hard to change people's shopping behaviors. And equally, it's hard to change them again. So the fact that people have gotten used to cooking at home and having meals with their families. A lot of people are still working from home and looks like that trend may continue even after things start to return to normal. I don't know, Scott, is there anything...

Yes. Look, I think we've probably got some confidence in -- we do, do store surveys of shoppers. Their feedback has been positive through this period. They have to -- some of them have rediscovered the local IGA and have been pleasantly surprised by the offer through range price and everything else the independents do and do real well. But I think if you look at those numbers and break it down, I think there's more in the data there in front of you that says some of those states like WA or even New South Wales, it's been in a pretty relatively free state -- free COVID environment for quite a while. We're still getting good sales come through. So for me, we're getting those shoppers come back, and I think the data is showing that. So it's not just been a blip because of the start of the panic buying.

Yes. Okay. And obviously, you talked about with the DSA, 40% of stores have been upgraded and gone through that program. Just to give a bit of context here. Are you able to just give us a view what proportion of sales did those 40% stores represent pre-upgrade? I'm just trying to think, you see, the -- what's the best stores that have been upgraded first, and so the impact from here will be less? Or how do we think about that?

No. I think it's a similar number. I think it's a mix of stores. So worked on large stores and small stores. So obviously, in our network, we have a big range. I think it's relatively the same number. What we did call out though was that we've pivoted a sort of 12 -- or 18 months ago to start focusing on the stores that had the biggest improvement to make. And they're the one that we've been focusing on in this last period. We probably, obviously, didn't do as many as we would have liked to because of COVID. But again, it's a great call out of support from the retailers in the program that, one, they're getting them done, and remember, they're getting them done in an environment where they were getting absolutely slammed with incremental costs they were getting. They had a lot more sales. They could have just focused on COVID, but they didn't because they see the underlying benefit of resetting their stores.

Yes. Understood. And just the last one for me. You've obviously talked about it in the outlook and expectation that, basically, because you over-indexed in regional and rural areas, that should see a real benefit for you, particularly across this Christmas and New Year period and arguably also when you overlay the impact of the bushfires, you should see that benefit through to maybe the end of February. Again, some context here. What proportion of sales would typically come from what you'd classify as these regional and rural areas across food and liquor? Any context that you can give?

Yes. It's about 60%, I think, of our...

Yes, 50-50.

50-50, is it, Scott? Sorry, yes, 50-50. So yes, I mean, that's -- what we are expecting is that we will see good trading because of people staying around, taking their holidays locally. The good presence that we have in those resort in regional areas. And bushfires absolutely did have an impact on all 3 of the businesses last year all the way through. Actually, bushfires had stopped by February. It was, then, into the floods. But between the floods and the bushfire, we absolutely did see some impacts.

And so just to be clear, you're saying that 50% of your food sales are coming from regional and rural areas and 50% of your liquor sales?

No. On food, I'll comment. What we're talking about, the spread of our footprint. I don't think we've ever given direction on the sales, but certainly, 50% of our network sort of 50-50 metro versus regional split.

And then within region?

The regional split?

50% in liquor as well. All right. And that's store numbers not sales?

Yes.

Your next question comes from Aryan Norozi from UBS.

All right. First one for me. You guys mentioned that scores impacting the Hardware 70%. What was that number in second half '20? Shall we say what the benefit is in terms of annualizing that?

We haven't broken it out before. But I mean, we've seen it improving from -- I think at the acquisition, it was about 50%, wasn't it Annette? So it's just been on a steady sort of increase. We didn't break it out in the second -- in the first half of last year, but it would have been in the sort of between 65% there -- yes, around 65% or so. So it's now into the low 70s, which is good.

Okay. And then in terms of pricing in IGA, are you now comfortable with your relative pricing and consistency across the fleet? And how much more work you're going to do in terms of getting it to where you're comfortable with?

Yes. No, look, I think it's a work in progress. Team's made good progress over the last few years. Customers have recognized that. But that's a never-ending journey. I can tell you, I've been on it for a long time in retail. But we still got more work to do, but it's great to see the work that's already been done and customers recognizing that work. But Scott and his team, and these guys are still focused on making sure that we get the retailers as competitive as possible.

And in terms of -- when you renegotiate channels and supplier, not like I'm [ referring to anything ] specific, but is the funding mix or the contribution towards you guys getting better because your performance is improving as well? Or is it -- and you had an opportunity for you guys to pull back the last [indiscernible]?

Well, look, I think your trade terms are always based on how well you're doing with your sales. So yes, you would see better terms as your sales are increasing.

And then last one is capital management. I mean how do we think about return -- capital return? You've obviously raised equity 2 months ago, but the next 12 months, we've got a good sort of net cash position generating free cash flow, what's your plan there?

Actually, it's Brad. I, obviously, won't be able to make those decisions, but I can actually tell you in terms of where our balance sheet actually sits. I think the only thing you need to actually take into account -- my philosophy has always been, and I don't know, Alistair, you can add some more at the end, is to the extent we actually don't need the capital, we will actually return the capital back to our shareholders. We do have a very strong balance sheet and net cash flow of the position. And as those of you who were on the register monitored the loss, buyback will recall, we have a very favorable tax position in terms of split between cash flow and revenue and our ability to return capital back to our shareholders by way of current dividend. But ultimately, I don't know, Alistair, do you want to add anything?

Yes. Thank you. Similar to what Brad's saying, one of the principles of what holds Metcash in strength today is a disciplined approach to capital management. There's a seasonal fluctuation that goes through working capital. And you've seen some of that reverse in the first half. So we'll monitor that in the second half. There's the focus on strengthening the core, which all the pillar executives that Jeff's outlined, would then come down to deploying the capital. We've had the MFuture program, some of the acquisitions that have gone, and that leads to free cash flow. The dividends, a strong dividend in the first half. And I'd imagine that'll continue as we go depending on the performance in the second half. So if there's surplus capacity, I'm sure that Directors will consider the outlook at the time when we get to the full year position.

Your next question comes from David Errington from the Bank of America.

Just you seemed to have done a very good job on the COVID cost management. Can you give us a bit of -- I suppose it goes right through your team, but can you give us a bit of -- I suppose it's scheduled through out your team. But can you give us an idea, because I remember when you were talking about at the end of your full year, you were concerned about that part of the business, and you mentioned it in your talk today. Can you give us a bit of an idea where you might have been running at April and March, in terms of COVID costs? Where they were hitting you and what you did to actually get those costs under control? And are your supermarket customers still wearing elevated costs. So there's a fair a couple of assets to that question, but can you give us a bit of an idea as to what the dynamics have been behind managing those costs and where they've been running at and where they're running at the moment?

Yes. Thanks, Dave. I think that as I referred to back in March and April, we were just in absolute reactive mode to the panic buying. And that forced us to have to run DCs 24/7. You're obviously into quite premium rates when you do that. We were adding in lots of casuals to come in to try to help us, and again, that's some premium rates. And we did say at the time that if the sales stayed elevated, but not at that same level, we felt like we could get on top of that and more normalize those costs, which we were able to do from sort of May onwards. So the volumes were still up across all 3 of the businesses. But they came to a level where we could get a grip of that and more normalize the cost, and that's the reason why the operating leverage just became much better. The cost that we have called out there doesn't have anything to do with the elevated volumes. This was purely down to some of the COVID-safe work practices that we had to put in place. So for example, in Victoria, because of the more strict restrictions that were put in place there. We actually had to end up working our DC there in 2 shifts instead of 1. And we didn't have a gap between those shifts. We weren't allowed to work over a certain amount of overtime. That forces to have to work some on weekends. So part of what you see called out there in the $8 million would have been those extra restrictions that were put in place, purely for us to make sure we stayed aligned to those COVID safe work practices. As far as what's been called out by other businesses, I don't actually know where all of that cost is coming from. Because when I talk to our retailers, and again, where JVs -- with a number of them, they're not seeing that same level of elevated costs in their businesses. They are having some but nowhere near the levels of costs that are being called out by some of the others. I don't know, Scott. Is there anything you want to add?

Yes. Look, I think just on that with our stores, I think traditionally, the independents provide a much deeper level of service. And I think through this -- their staffing levels were maintained. And they were able to adapt in a different way to others, I think. So that's one of the key differences.

I don't understand that, Scott. How would -- can you go through that again? So your service levels were high, so you didn't need to -- put any extra in on top of that. Is that what you're saying there? So really, you got these extra sales and you didn't have to put an extra cost in, is that what they were saying?

No. So I'm -- from a wholesale level, obviously, being incremental sales, we managed our costs well. And from a retail sales level, yes, the increased sales for our retailers meant they needed more staff, but probably comparable to others, not as many. We traditionally run at a higher staff rate because of the service that we provide in the store.

Prior to the quarantine, the retail network has, itself, which as opposed to the actual Metcash cost but. I think in relation to our cost base, what we actually find. As soon as we actually got some kind of stability albeit elevated stability coming through our numbers, we were able to actually manage those costs. What actually wasn't good in the early days is things are actually spiking and everyone didn't know there it was actually going, and we're scrambling get our head around the new normal. It was very, very difficult for us. What we've actually managed to do now is actually operate under what is actually the elevated the level of sales in an effective and efficient manner. So as Jeff putout, we are obviously incurring higher costs and those higher costs are partly due to -- almost due to the higher volumes we actually have seen. And we're not calling out those out of COVID costs. What we are calling on is COVID-related cost is where we've actually had 12 people at the gate check people for temperatures, where we've actually had to split shifts, where we actually had to go to the occasional night shift or something to get the volumes out. So I think it's a real testament to Scotty and his team in terms of how we've actually managed, Annette as well Chris, how we manage those costs over this period to limit the COVID-related cost to only $8 million.

Yes. It's a real standard. And you guys have really done a brilliant job of managing that. And yes, I mean, that's a real cool of you guys. The second point is -- and just as I suppose, I don't mean to talk about what others are doing, but the others are calling out, obviously, a growth in the online strategy. And when I look at your Food MFuture initiatives, it's really notable that digital is missing in that. Now it has been for a while, and I know, Jeff, you've got your views on it. But given how aggressive the others, particularly the chains are going, having an online strategy, is it making you reassess your initiatives a little bit, maybe that you do need to be a bit more aggressive on an online strategy, particularly in food going forward for the next 2, 3 years?

Yes. So look, Dave, I think we'll have more to say on that in March. But obviously, the hardware business has had a good digital presence for a number of years now, and the sales doubled. 100% up in the first half. So good progress made there. Food, we didn't before because it wasn't widely wanted by the network. That all changed in March. And we spun up this IGA online shop very quickly. It was quite canty, as we've admitted, that look, it worked. And it got the retailers interested. We move that on then to a sort of a normal online shop, and we just recently now have received the latest version of that, which has gone into a trial in a couple of stores. And that's what we'll talk about in March, but there's absolutely significantly more interest now from the retailers. And we can outline for you a bit more on what we're planning to do with that in March. But this latest version that we put in the trial now looks very exciting and the retailers that we've showed it to have felt the same way. And then in Chris's business in liquor, very similar. We're coming from a standing start. But a real credit to the team, they spun up that Shop My Local. We were actually planning to launch that about this time. And they launched that back in March and April. We've gotten significant learnings out of that, a lot more interest now from the retailers. And again, by the time we get to March, we'll have a lot more to say about what we're planning to do in food and in liquor and how we're going to continue to grow that business in hardware. I don't know, Scott, anything you want to add?

No.

So you won't be at a disadvantage? You think you've got enough going for you -- with you, potentially, in Food, that you won't be at a disadvantage, if, for example, online continues to grow and Woolies and Coles continue to grow at the rate that they're growing? You should be able to mitigate that, is that what you're thinking? Or do you need to even sharpen your pencil a bit more?

Well, look, yes, Dave. I think, as I said, we're in the game now when we weren't before. And the retailers are definitely got a lot more interest in getting into it. As I said, this latest version in Food of the website. The one thing about coming into it late, it allows you to do a bit of digital leapfrogging. So we've been able to build our website with some of the latest thinking. So quite excited, as I said, opportunity there, and we'll have more to share when we get to March.

Yes and just on -- our online offer is, probably, from what we're seeing and the feedback from our shoppers is taking sales from themselves. So we don't believe we're getting significant impacts. And certainly, the numbers we're showing -- are saying that we've been impacted by their growth in online at the moment. But we are very keen to pursue this area. And we think there's an opportunity for us to gain some more customers back through it.

Your next question comes from Michael Simotas from Jefferies.

The first one for me. And look, you've touched on some of this already, but there's a huge growth in the contribution of profit from associates, it's up about 2.5x on the same time last year. So I guess that provides us with some indication of how profitable your customers are at the moment, or certainly your large customers anyway. What does that mean for your business? You've spoken a little bit about appetite for investment, but I would have thought these customers are very cashed up at the moment. So if they see future in -- or growth potential for their businesses they've clearly got the cash to deploy. So maybe you can make some comments on that. And then also, there's been a lot of concerns around further customer leakage following Drakes and 7-Eleven. Can you just talk about what you think the stronger profitability for your customers means on that front as well?

Yes. Look, I think that, obviously, the ones that we are close to, and we do see the numbers, they have done well just as we have. So I think the overall network itself has done well, mainly driven around those factors that we had said. Look, the retailers, both Scott and I have already called out, the retailers are absolutely very interested in more refreshes, more DSAs. We get lots of interest now in any new stores that are going to be available. So it's significantly different view from the retailers now both on reinvesting back into their stores with the confidence they now have in the network, but also wanting to find more new stores. I don't know if -- Scott, anything you want to add?

You talked about our retails, Michael, you know that there was a significant sort of gap in the relationship going back a few years. I think we've closed that gap. Calling out a significant event like COVID, I think brought us all closer together. And retailers saw that the importance or the significance of having Metcash with them through that period. And I don't think they could have got that performance unless we were at the table aligned. So I'm pretty confident that we've got things heading in the right direction. And I do think there will be growth, and I think we'll try and call some of that out in March, and we'll chase all those opportunities as they come up. But the relationship is certainly stronger than it has been in a very long time. And if you talk to those retailers that you talk to, I think you'd hear the same.

Yes. No, that's fair. And then just a couple for Brad, if I can. Just around provisions, et cetera. So the onerous lease write-back, you got 0 in this period. Clearly, you won't be around. But how should we think about that going forward? Is the process complete now and you're not expecting to get any more benefits through the P&L? Or is this a bit of an anomaly?

So I think it's getting harder testing the matter. As I said, we've done a lot of them. There are still some sitting out there at the moment, and I think they have actually got some that, [ Sam ], the property team are trying to actually negotiate. So I think there is the potential for them to actually be some in the second half. So -- but it will be -- it's not going to be anything near the quantum that it's actually been in what we've reported previously.

Okay. That's good. And then on provisioning around receivables. Last year, both above the line and below the line, you had fairly meaningful impairments to receivables. So in food, there was a little bit more above the line than there normally is, and then you have the big or the larger liquor impairment below the line. Has there been any change to that provision account in the first half of '21?

So we -- nothing material, Michael. In terms of actually doing it, what we've actually looked to do is to actually keep those some of those provisions, particularly in relation to liquor, that they actually set up until we actually got through, and we're very confident that the COVID position had actually settled down. So no, not a huge change.

Okay. I guess given the situation has improved, and obviously, it's COVID, so things could change again. But where we stand now, it looks like that provisioning was probably conservative. Would you agree with that?

In terms of actually looking at the provisioning and when we actually took the provision, it's actually the pricing provision to actually take. And as we actually look at it now, I think we just want time for us to actually settle down before we actually make any call as to whether we actually release it or not.

Your next question comes from Phil Kimber from E&P.

I've actually got some questions for Brad as well. Firstly, just on the working capital. The main driver of it looks like it's actually trade payable. So inventory-wise, when you look at it on a 6-month or 12-month basis, but it seems to be that the trade payables that really saw that net working capital come down. So can we talk about if there's anything unusual there, a timing issue that might reverse? Just wanted to understand that, again, better.

So just in terms of doing it, obviously, we have the same supply in terms of the supplies and the volumes actually spiked, and we've seen an actual increase in the amounts of payable. But clearly, not too different from the change. These supplies fund most of our inventory position. And as the turnover and the volumes have actually got -- we have been able to actually hold the inventory relatively consistent despite the actual increase in volumes. So I think the only thing that could potentially actually have it come down as sales to actually to go soft to slow. There, it depends to some of that debt/credit positions [ online ].

Okay. And should we actually expect an absolute reduction in inventory? Because I know you talked previously that I think inventory was one of the key reasons why the working capital had increased initially, should we actually see an actual dollar increase in inventories?

I'm looking at my now former colleagues around the table. And -- whom I've actually beaten up over the years to actually get that working capital position down. I think they're all smiling at me. I think in terms of actually doing it, we -- I don't think it pays actually often to actually see that actually come down dramatically. I think we had pushed that position pretty, pretty hard as to where we actually have got to over the years. So I wouldn't be factoring any major change in the inventory position. Obviously, sales change as we get a proportional change.

Yes. And then just a couple of accounting ones. One, on the 100% contribution from Total Tools. I couldn't see, obviously, where the 30% that you don't own gets backed out? Is that in like a minority interest? Or does that actually go through that liability that you talked about?

So in terms of what we actually do is reporting 100% of the income going through our books. And in terms of the actual minority interest, what we're actually doing is reflecting their share of their ownership of the company by way of a liability on the balance sheet.

Well, okay. So that -- I had a look on the P&L, there's a minority interest line, which hardly moved, so that it's not going to go through there at all, it's the one that got you into P&L, it's actually going to go through the balance sheet. Okay. And then my last question, quickly was just -- I don't think you give a franking account balance at the half, and you were talking about thinking potentially capital return. I was just wondering if you could remind us what the franking account balance was.

Franking account balance is significant. I'm struggling because we don't look at it at the moment. We'll, get it to you. It's in our year-end account. It's disclosed in the most of the year accountant that's $173 million is the exact number. And every dollar, we actually -- obviously, we're paying tax. If you look at our tax rate coming through, we are almost at 30% taxpayer. So we continue refreshing those franking credit.

Yes, now 60% roughly dividend payout, so you're sort of keeping 40% of your tax that you file every year as well, franking credit, so to speak. That's great.

There are no further questions at this time. I will now hand back to Jeff for closing remarks.

Yes. Look, thanks, everybody, for joining us this morning for the results. And I know that we'll be catching up with a number of you over the next 2 or 3 days. Thank you.